Result

• Tan Chong Motor (TCM) registered a headline net profit of RM 19.4m during 2Q19. After excluding the exceptional items such as provision/reversal and (write off) of receivables and inventories, gain on disposal of properties plant and equipment (PPE), PPE written off, forex gain and loss on derivatives, the Group recorded a core net profit of RM18.8m in this quarter, which tumbled 15.1% qoq and 6.9% yoy. Meanwhile, revenue stood at RM1.1b, which depleted 1.3% qoq and 2.0% yoy.

• For 1H19, the Group reported a core net profit and revenue of RM40.8m and RM2.1b respectively, improving 19.2% yoy and 1.1% yoy.

• Below expectations. The Group 1H19 performances was below our FY19 net profit expectation (17.7%) as well as consensus (18.9%). The lower-than-expected performance was due to lower car sales volume coupled with lower hire purchase receivables under financial services segment.

Comment

• Subdued domestic Nissan sales during 2Q19 weighed down QoQ and YoY topline despite improved margin. TCM’s revenue dropped 1.3% qoq and 2.0% yoy due to discouraging domestic Nissan car sales during this quarter. Domestic Nissan car sales only inched up 1.0% qoq but contracted 21.2% yoy due to stiff competition among car makers. The Group had introduced new X-Trail facelift which was launched in April’19. However, it failed to spur its volume during 2Q19. On the other hand, the Group’s PBT regained its ground by growing 37.3% qoq and 64.5% yoy, thanks to favourable sales model mix from auto segment coupled with forex gain arising during this period.

• Greater revenue from overseas markets lifted 1H19’s performance. The Group’s revenue and PBT improved 1.1% yoy and 84.3% yoy respectively during 1H19. The encouraging result was underpinned by greater revenue from overseas markets (Vietnam: +51.9% yoy; Others: +68.7% yoy) despite lower revenue from Malaysian market (-9.4% yoy). We believe strong demand for Nissan Navara and Nissan Sunny in Indochina market helped to boost the Group’s earnings which offset the lower domestic Nissan sales volume (-12.9% yoy).

• Looking forward, the Group expects business prospects remain challenging amid stiff completion among carmakers, subdued consumer sentiment towards big-ticket items and forex volatility which could dampen the overall Group’s performance. The Group has just

launched all-electric vehicle (EV) CBU Nissan Leaf in July’19, with a retail price of RM189k. However, we do not expect significant sales volume for this model due to its steep pricing. Besides, the new Nissan Leaf does not qualify for any incentives under the current Energy Efficient Vehicle (EEV) scheme.

• Gloomy outlook for domestic Nissan sales volume. Overall, we reckon that domestic Nissan car sales remains subdued in FY19 due to high base effect (zero rated GST during June’19-Aug’19), weak MYR against JPY and USD as well as stiff competition from other car marques amid lack of volume-driven models. We only expect the Group to launch new models for Nissan Almera, Nissan Kicks and Nissan Sylphy in CY2020.

• Dividend declared. The Group has declared an interim single tier dividend of 2 sen per share for FY19 to their shareholders.

• Exploring Southeast Asian commercial vehicle markets. On a separate announcement, TCM announced that their wholly-owned subsidiary, TC Manufacturing (Labuan) Pte Ltd (TCMAN[L]) has entered into a Memorandum of Understanding (MOU) with SAIC GM Wuling Automobile Co. Ltd (SGMW) to look for business opportunity in introducing SGMW commercial vehicle products to Vietnam, Myanmar, Cambodia and Laos. SGMW is a China based company which produces commercial vehicle, passenger vehicle and engine for its vehicles. We reckon that this joint venture will further strengthen its auto business, anticipating better contribution from commercial vehicle segment in Indochina market.

Earnings Outlook/Revision

• We cut our earnings forecast for FY19 and FY20 by 13.3% and 13.7% respectively to account for lower car sales volume and lower margin.

Valuation & Recommendation

• Downgrade to HOLD from BUY with a lower target price of RM1.54 (from RM1.76) following our earnings cut. Our valuation now pegged at 11x FY2019 PE with revised EPS of 14sen (16sen previously). Target P/E ratio assigned is below average sector P/E of 15x.

Source: JF Apex Securities Research - 21 Aug 2019